Month: July 2011

  • Why burger stands, gas stations and politicians tend to cluster

    Presh Talwalkar has an elegant explanation on why competing entities in an environment where demand is linearly distributed (like two burger stands on a beach) tend to cluster in the center of demand.

    The intuitive explanation is this: Imagine two burger stands on a straight beach a mile long with the beach crowd evenly distributed along its length. Customers will gravitate towards the closest stand. If one stand was a quarter mile from the left and the other was a quarter mile from the right, they would have an equal number of customers.

    But if one of the stands moved slightly towards the center, it would gain more customers and the other stand would lose those same customers (a zero sum game). So the optimal position for both stands is dead center i.e. on top of each other. That gives them both 50/50 market share and prevents the other stand from gaining more market share.

    …even though it causes people on the beach to have to walk further to get a burger.

    Check out Presh’s blog entry for a full explanation and accompanying graphics. He relates this to why politicians tend to position themselves in the political center and why news channels all carry the same stories.

    Bringing this back to the real world, I wonder about things like goodwill, brand loyalty, pricing power, brand cachet and so on. Positioning yourself in the center of the beach, in the center of the political spectrum or, if you’re a news channel, carrying the stories everyone else carries does not engender much love in your target market.

    If a competitor were to come along and position themselves off-center, they may sacrifice a portion of the market, but develop fierce loyalty among their customers for being better and being different.

    This brings to mind many famous brands who started with a cult following:

     

  • Listen to this podcast on the budget process, you must

    Keith Hennessey does a spectacular job of explaining the complicated process of arriving at the federal budget and where it is currently stuck in this week’s Econtalk.

    He also breaks down who has the power to move things forward right now. It’s so good I was tempted to transcribe selected bits here, but I just don’t have the darn time.

  • Obama Campaign comes a calling

    Got another call from the Obama campaign today who I spent a lot of time and energy supporting last election. I don’t support either party currently because I’ve evolved into an economic conservative but still socially liberal which leaves me stuck with no party to support.

    So just for the hell of it I tried to convert the volunteer into a Hayekian liberal. After 5 minutes he still wouldn’t bite.

    He did mention he’s had a rough day. Surprised, I am not.

  • The US City with the Fastest Internet is…

    According to Pando Networks, Seattle has the fastest average Internet speed in the country with an average speed of 1,017KBps. Compared to San Francisco and Austin who have 912KBps and 911KBps respectively
     

     

  • What in the world…

    Someone just arrived at my blog by Googling:

    WHAT IN THE WORLD IS GOING TO HAPPEN TO THESE PEOPLE IN THE US WITH THEIR SOCIAL SECURITY CHECKS

    A reminder of the hard problems Google’s engineers are working on.

  • My new favorite "we're screwed" graph

    Yesterday FT.com’s Alphaville posted a graph showing that the US treasuries CDS graph had inverted for the first time ever.

     

    What that means is that the cost to insure against default on 1 year US Treasury Notes costs more than it does to insure a 5 year note. This goes contrary to economic liquidity preference theory – meaning that investors generally see bonds with a longer maturity as being riskier so to insure them usually costs more.

    So why does it cost more to insure a 1 year treasury bond? Investors see the risk for the US government as significantly higher in the short term and that psychology creates this weird effect.

    Footnote: I’ll make this clearer in another blog entry but for now I’d like to add that I see the risk of an actual default by the US government is extremely close to zero. If we don’t get our act together by August second, we don’t automatically default. We just have to gradually make harder and more irresponsible decisions about who to pay and what to defer. Those decisions have a forcing effect on our political system as pressure will rapidly mount beyond calls from disgruntled constituents to calls from creditor’s lawyers.

     

     

  • Every national curriculum should require web programming for graduation

    Every primary and high school curriculum should include a mandator web programming course the same way it includes math and a first language.

    When’s the last time you used pythagoras? How about Euclids proof of the infinitude of primes? Both of these are popular in high school math curriculums.

    My sister one of the best chef’s in Cape Town. She writes about food and runs a restaurant review site. She doesn’t use pythagoras that often I’ll bet. But she recently asked me for shell access to the server her blog is hosted on so she could run “chmod 775 *” on a directory to fix a permissions issue. She’s also buying templates from Themeforest and knowing PHP would help her customize them and fix a few bugs.

    Most non-programmers think of programming as a 3 to 4 year computer science degree, a course of advanced calculus thrown in as a prerequisite for graduation and the ability to write a basic compiler or operating system.

    Here’s the truth: Most programmers spend 99% of their careers writing very simple code that is not that different from english. Most of it is a knowledge of syntax rather than opaque math or implementing complex algorithms. Ask any one. Most of them will tell you the last time they used calculus in programming was in school.

    It’s my strongly held belief that everyone should start learning basic programming starting age 7 and the course should continue through to graduation from high school and should be prerequisite the whole way. It should include the following:

    • PHP. It’s open source and the most popular programming language on Earth for many applications beyond just Web. My computer science grad friends are probably freaking out that I’ve chosen a loosely typed language that doesn’t require variable declaration and isn’t purer OO, but it’s the most popular language and it’s what real people actually use to get the job done.
    • Javascript. It runs in every browser and now on many servers.
    • HTML. Obviously.
    • CSS. Obviously.
    • SQL using MySQL.
    If a country were to require all it’s students to graduate from high school with a working knowledge of the above, it would be vastly more competitive. That’s the goal of a national education curriculum.

  • Why startups are attracting so much investment

    There has been plenty of speculation during the last 2 years that we’re in a tech investment bubble. It seems every blogger is trying to “call it”.

    It hasn’t burst yet and if AirBnB’s $112 million round of funding announced today is anything to go by, it ain’t going to burst any time soon.

    Lets pretend the US dollar is going to continue to fall in value. You have an appetite for some risk and you’re watching your dollar denominated wealth dwindle away.

    You could invest in bonds, but we all know that’s not very chic right now since even sovereign debt defaults.

    You could buy currency, but just when you thought the Euro was safe, turns out half the Eurozone is in crisis and the charter doesn’t even have a clause for a member state defaulting. It “just wan’t supposed to happen”.

    You could buy gold, but that looks like one hell of a bubble waiting to burst. [Although my prediction is that it will keep rising until early next year]

    Hey what about Treasury Bonds. Well we already had that conversation about August 2nd earlier today, so forget that.

    What about commercial or private real-estate. History has shown that has always been a safe investment …if you exclude recent history.

    All this makes the US software sector look extremely attractive. Even *gasp*, startups!

    Software companies make more money if the dollar falls. For example Google’s Q2 2011 international revenue made up 54% of the total and is increasing. If the dollar falls, expect Google to bring back the free food and tea trolley.

    Software is not as affected by rising interest rates (which are coming) as, for example, companies that need to borrow big to finance land, oil rigs, multi-year construction projects, etc.

    The software labor force is completely dynamic. Software developers can work remotely and many companies (like WordPress) have entirely distributed teams. So if India or China gets expensive, we’ll just move it back on-shore. But more importantly, because software labor can be based anywhere it is a much more efficient market than running a US based law firm for example.

    The target market is also dynamic and can quickly be switched from one country to another. Unlike brick and mortar businesses, switching from selling in the UK to China simply requires a team of translators and to stop spending ad money and resources on the country in question and divert is somewhere else. No physical stores to shut down, no plant to move, no warehouse to dispose of.

    And of course once you’ve written the software, the ongoing cost of running a software company is not much at all. Sure you need to keep innovating, but if the company stops writing software tomorrow the revenue keeps flowing.

    The US has a track record of being the best at software. It’s rare to see a viable foreign competitor for the likes of Google, Facebook, Microsoft, Oracle, CA technologies, IBM, Accenture etc. I’m not discrediting awesome companies like SAP, but they are rare.

    Companies like AirBnB, Facebook and Groupon represent a new breed of software company that is more efficient, nimble and profitable. They don’t require a on-the-ground sales team like IBM, Microsoft and Symantec. The team can be based anywhere, their server resources are distributed across the globe and all their revenue and costs are completely dynamic and distributed and can adapt continually to the rapidly changing environment.

    In the current investment and risk environment, software startups are, understandably, just about the sexiest thing since, well, this:

     

  • Disappeared from Hacker News … again. So I'm done.

    I get wierded out when an opinion piece I posted about the impending debt default is on the home page of Hacker News for 20 minutes and climbing – and then gets disappeared.

    The article is still posted on HN, no message that it’s flagged as spam, no email. Just a little tweak that disappears me from everything except “new”.

    This has happened more than once. It and an increase in comment negativity has driven me off. I’m done.

    Goodbye HN, fare thee well.

     

  • What will happen if we default on August 2nd?

    With Greece defaulting – not a “technical default” or “restructuring” as it’s being branded but a real live default – the stage has been well set for August Second if the USA does in fact default on it’s own debt.

    I tend to percieve the sky as falling earlier than most because I grew up in an environment of political instability. That said, I worry that we have underestimated the incompetence of our legislators. They may not realize how serious the consequences are if we don’t do something – anything – to solve the issue coming up on August second. They rarely have to solve a problem that is truly time critical because – well hell we’re the United States of America and we set the damn clocks the way we see fit.

    The rare instances of time critical decisions required from our lawmakers are usually related to war. Sad and cynical as it sounds, wartime is an incredible opportunity for any government to push through ideological agendas  – like the patriot act – that are enthusiastically adopted by opposing lawmakers and the populace while emotions run high and we’re willing to trade some liberty for some safety and another excuse to wave the flag.

    But this isn’t one of those times.

    Ideological forces are strongly opposed in our government and any decision is going to leave a bitter taste in everyone’s mouth. So no one wants to make the decision. Which is why I’m worried there may be no decision by August 2nd and we will be well and truly fookered.

    What will the consequences of a default on August 2nd be? Here are my bullets and they’re all pure speculation:

    • Interest rates in this country will start to rise and continue for some time. Remember, the Federal Funds rate was over 20% in June 1981.
    • The housing market will start a double collapse due to a rapid rise in mortgage interest rates.
    • In the uncertain environment, housing sales will stall and the terrifying housing data in September, October and November 2011 will have a knock on effect i.e. home sales will completely stall.
    • This will precipitate what should have occurred in 2008 and 2009 had the banks not been bailed out. The assets underlying many of their creative financial products will drop massively in value causing many banks to fail, this time without a bailout.
    • Because the dollar is the world’s reserve currency and many countries are holding Dollars, US debt and dollar denominated debt, a world financial crisis of epic proportions will begin to unfold.
    • If ratings agencies actually downgrade US debt, the effect will be catastrophic. Many banks, countries and other organizations are required to keep a specific mix of risk on their balance sheets. This will force world-wide balance sheet restructuring as countries and companies move away from the US dollar or dollar denominated debt – specifically US government debt.
    • The dollar will increase the rate of it’s current slide.
    • Gold prices will hit $1800 in September/October and $2200 or more by year end.
    • Credit will once again dry up wreaking havoc among businesses and banks.
    • Expect massive layoffs world wide as businesses deal with lack of access to credit and batten down the hatches preparing to weather the storm.
    So what good will come of this?
    • With a declining dollar, US exports will earn more money.
    • There will be a massive power restructuring in corporate America as incumbents fail by the hundreds, opening up opportunities for young, innovative businesses.
    • Some wealth will be transferred back from the wealthy holding US dollars to the true innovators in this country as the dollar declines and the value of exports increase.
    • Manufacturing jobs will return to the USA as it becomes cost effective for other countries to use our labor force and base operations in the USA.
    • Our politicians will be exposed as incompetent and old power bases and old boy networks will crumble giving way to new blood, new ideology and possibly a new political party in the United States.
    I’d love to hear your  prognostications in the comments, good and bad, of what will happen if we don’t raise the debt ceiling by August 2nd…